The Legacy Of Ben Bernanke

Ben Shalom Bernanke has served as chairman of the Federal Reserve (the “Fed”) during a tumultuous period including the biggest financial challenges faced by the United States since the 1930s Depression. Bernanke’s decisive actions during the rapidly escalating 2007-09 global credit crisis are widely acknowledged to have averted an economic catastrophe, while his unconventional policy measures jump-started a U.S. recovery after the “Great Recession.” But will Bernanke go down in history as one of the greatest-ever chairpersons of the Fed, or is his legacy likely to be tarnished by events after his departure?

Credentials and Credibility

Bernanke has a glittering resume replete with accomplishments from the time he was a high school student. He grew up in Dillon, S.C., where his scholastic achievements included scoring a state record of 1,590 out of 1,600 on his SATs. Bernanke received a B.A. in economics from Harvard University in 1975, graduating summa cum laude, and a Ph.D. in economics from the Massachusetts Institute of Technology in 1979.

Bernanke was an assistant professor of economics at Stanford University from 1979-83, and an associate professor of economics from 1983-85. In addition, he was a visiting professor of economics at MIT (1989-90) and New York University (1993). Bernanke also served as a professor of economics and public affairs at Princeton University from 1985 to 2002, and he chaired the economics department from 1996 to 2002.

Bernanke began his extensive involvement with the Federal Reserve System in 1987, when he was a visiting scholar at the Federal Reserve Banks of Philadelphia (1987-89), Boston (1989-90) and New York (1990-91 and 1994-96). He also served as a member of the Academic Advisory Panel at the New York Fed from 1990 to 2002, and as a member of the Board of Governors of the Federal Reserve System from 2002-05. From June 2005 to January 2006, Bernanke was chairman of the President’s Council of Economic Advisers.

Bernanke originally assumed office as chairman of the Federal Reserve’s Board of Governors on Feb. 1, 2006, when he also began a 14-year term as a member of the Board. He also served as chairman of the Federal Open Market Committee, the Fed’s principal policymaking body. Bernanke’s second four-year term as Federal Reserve chairman commenced on Feb. 1, 2010.

Bernanke’s academic credentials and extensive experience with the Federal Reserve give him enormous credibility on the Street. In 2009, he countered criticism that the Fed was out of touch with reality by highlighting his small-town upbringing, saying his origins from Main Street in a “really depressed” small town made the crisis very real to him.

Bernanke’s Philosophy

Bernanke is an authority on the Great Depression of the 1930s, and his keen interest in the subject translated into a life-long study on the pernicious effects of deflation and the measures available to prevent it.

In November 2002, Bernanke gave a famous speech titled, “Deflation: Making Sure It Doesn’t Happen Here,” to the National Economists Club in Washington. In that speech, Bernanke defined deflation as a side effect of a collapse in aggregate demand, or a drop in spending so severe that producers must cut prices on an ongoing basis to find buyers. He noted that the economic effects of a deflationary episode are the same as those of any other sharp decline in aggregate spending – recession, rising unemployment and financial stress.

Discussing methods that could be used to stave off deflation, Bernanke referred to noted economist Milton Friedman’s “helicopter drop” of money as one way to do so. Bernanke’s critics subsequently pounced on that reference to give him the sobriquet of “Helicopter Ben” when disparaging his economic policies. Few could have thought, however, that Bernanke would use some of the methods outlined in that speech – such as the Fed expanding the scale of its asset purchases or expanding the menu of assets it buys, to stimulate aggregate spending when short-term interest rates have reached zero – before the decade was over to prevent the U.S. recession from turning into a depression.

Bouquets and Brickbats

Bernanke was initially slow to recognize the dangers posed to the economy by the unprecedented surge in U.S. real estate speculation and subprime mortgage lending that peaked in 2007. In the spring of that year, he maintained that the growing problems that were becoming apparent in the U.S. housing market were largely contained to subprime mortgages. However, once the crisis began escalating, Bernanke took prompt and resolute action, using the sweeping powers of the Federal Reserve to put out one fire after another in the financial markets before they became an all-consuming conflagration.

From 2008 onward, Bernanke and the Fed embarked on a series of unparalleled – and often unconventional – rescue programs and stimulus measures. These included:

ratcheting interest rates down to the lowest levels in American history;

force-feeding the U.S. economy with trillions of dollars through successive rounds of “quantitative easing”;

bailing out troubled Wall Street firms and institutions;

orchestrating the rescue of other troubled financial institutions through shotgun weddings; and

lending funds to diverse sectors of the U.S. economy to revive stalled credit markets.

While this is by no means a comprehensive list of the measures taken by Bernanke and the Fed, it does provide an idea of the scale and scope of the Fed’s operations, and the sheer magnitude of the tasks involved in kick-starting the floundering U.S. economy.

In recognition of his efforts, "TIME" magazine named Bernanke its “Person of the Year 2009.” "TIME" said that as “the most important player guiding the world’s most important economy,” Bernanke’s creative leadership helped ensure that 2009 was a period of weak growth rather than catastrophic depression.

That’s not to say that Bernanke or his policies have not had any detractors. Many experts believe that one blot on Bernanke’s copybook is the Federal Reserve’s decision to allow Lehman Brothers to fail in September 2008. Lehman’s bankruptcy, the biggest in U.S. history at the time, set off a worldwide chain reaction that intensified the credit crunch and took the global economy to the brink of collapse in the fourth quarter of 2008.

Another criticism about Bernanke relates to the bond-buying sprees that the Federal Reserve has embarked on since November 2008, which had quadrupled its balance sheet to $3.7 trillion as of October 2013. At some point, the Fed will have to not only stop its bond-buying program, but will have to “unwind” its trillion-dollar bond position, which could send interest rates higher and have an adverse effect on the economy. In fact, the mere mention by Bernanke in May 2013 that the Fed would seek to “taper” (i.e. reduce) its bond purchases at the opportune time was enough to send global equities and emerging market currencies into a temporary swoon.

But five years after the economic nadir characterized by the Lehman Brothers bankruptcy, evidence about the success of Bernanke’s measures was unequivocal. At that point, the U.S. housing market was in a sustained recovery, the unemployment rate had declined from a peak of 10% in October 2009 to 7.3% in August 2013, and U.S. equity indices had reached new records as American companies reported blockbuster profits.

Bernanke’s Legacy

Bernanke’s lasting legacy may not be limited only to the newfound assertiveness and expanded reach of the Federal Reserve, but may also extend to its increased transparency and push for consensus. Under Bernanke’s stewardship, the Fed became the most transparent it has ever been in its history. As an example, from January 2012 onward, the Federal Reserve began publishing detailed interest-rate projections of all the 17 Fed officials who participate in policy meetings, and also outlined its goals for inflation and unemployment in greater detail than it had before.

On a lighter note, Bernanke can also be credited with making relatively obscure terms such as “quantitative easing” and “fiscal cliff” (and perhaps even “taper”) part of the common lexicon, just as Greenspan had popularized “conundrum” and “irrational exuberance.”

Conclusion

On Oct. 9, 2013, President Obama named Janet Yellen as the successor to Bernanke’s position as Fed chairman following the expiry of his term on Jan. 31, 2014. Yellen had been vice chairman of the Fed since 2010.

While Bernanke will in all likelihood exit in a blaze of glory as Fed chairman, the fact remains that a central banker’s eventual stature in the history books is based not just on how the economy fared during his (or her) tenure, but also on its performance in the ensuing years. Alan Greenspan, for instance, was hailed as one of the greatest central bankers during his tenure as Fed chairman from 1987 to 2006. However, in the aftermath of the 2007-09 collapse in housing and equity markets, Greenspan attracted criticism in some quarters for leaving interest rates at low levels for too long from 2003 onward.

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